Is Your Mortgage a Regret? Navigating Falling Interest Rates and Future-Proofing Your Finances
A staggering 20% of homeowners with mortgages are facing a tough question: did they lock in their rate at the wrong time? As interest rates tumble from an average of 5.59% in January to below 4.5% now, the sting of “rate regret” is real. But don’t panic. While breaking your fixed term is an option, it’s rarely straightforward. Understanding the landscape – and looking ahead – is crucial to minimizing costs and maximizing savings.
The Break Fee Dilemma: Is It Worth the Cost?
The most immediate question for those experiencing rate regret is whether to break their fixed-term mortgage. The answer, unfortunately, is often “it depends.” Banks protect themselves against fluctuating rates by charging a break fee – essentially recouping the difference between your agreed-upon rate and current lending rates. Squirrel chief executive David Cunningham cautions that these fees can often negate the benefits of switching. “Generally it feels like if you could save $10,000 in the next year, your break fee will be $10,000,” he explains.
However, a complete dismissal isn’t warranted. A mortgage advisor can assess your specific situation, factoring in potential restructuring benefits and cashback offers currently prevalent in the banking sector. The sweet spot for exploring this option is during your refixing period – when your term is up for renewal.
Waiting It Out: What the Experts Predict
For many, the more sensible approach is patience. Infometrics chief forecaster Gareth Kiernan notes a downward trend in wholesale swap rates, reaching levels not seen since early 2022. While direct comparisons are complex due to broader economic factors, Kiernan suggests a bottom of around 4.2% for rates in the coming months. The good news? Rates aren’t expected to surge significantly until mid-to-late next year, providing a window for most to refix at more favorable terms.
This timing is particularly relevant given the prevalence of fixed terms expiring within the next year. Knowing when your term ends is the first step in preparing for a potential refixing opportunity.
The Cost of Inaction: Floating Rates and Past Mistakes
While current rates are attractive, it’s important to remember the recent past. Choosing a floating rate over the past year proved costly. According to Kiernan’s calculations, for every $100,000 in debt, floating rate borrowers paid $6,920 in interest, compared to $5,960 for those fixed for a year. The biggest regret, therefore, isn’t necessarily a short-term fix, but remaining on a floating rate while waiting for rates to fall.
Looking back to July 2023, the optimal strategy wasn’t simply grabbing the lowest rate. Fixing for two years at 6.73%, refixing for one year in July 2025 at 4.87%, and then for two years in July 2026 at 4.53% would have yielded an average rate of just 5.48% over five years – a saving of $810 per year for every $100,000 borrowed, or $40,500 on a $1 million mortgage.
Future-Proofing Your Mortgage: A Dynamic Approach
The lesson is clear: a static approach to mortgages is a recipe for potential financial regret. The future likely holds continued, albeit moderate, rate fluctuations. Instead of chasing the absolute lowest rate at any given moment, consider a dynamic strategy. This involves carefully evaluating your risk tolerance, monitoring market trends, and being prepared to refix strategically as opportunities arise. The Reserve Bank of New Zealand provides regularly updated data on mortgage rates and lending trends, offering valuable insights for informed decision-making.
Don’t simply react to rate drops; proactively plan for them. Consider shorter fixed terms with the flexibility to refix, and always explore the potential benefits of professional mortgage advice. The key to navigating the evolving interest rate landscape isn’t just about securing a low rate today, but about building a resilient financial strategy for tomorrow.
What are your biggest concerns about rising or falling interest rates? Share your thoughts and strategies in the comments below!
